Tyler Durden over at Zero Hedge has an interesting take on Goldman’s AIG hedging:
Purchasing $10 billion in CDS (roughly in line with what Viniar claims happened) at a hypothetical average price of 25 bps (and realistically much less than that) and rolling that would imply that at today’s AIG 5 yr CDS price of 1,942 bps, the company made roughly $4.7 billion in profit from shorting AIG alone! This would more than make up for the $2.5 billion collateral shortfall (out of $4.4 billion total) GS claims AIG had with Goldman Sachs… If AIG had filed for bankruptcy, and assuming Lehman is any indication, the P&L would have likely hit $6+ billion.
Preliminary Goldman Call Observations [Zerohedge]
Add to this the money received from the government in the bailout and you get a tidy little profit to GS.
So GS calls the collateral, causing AIG to tank, thereby making money on the CDS. Then the government bails out AIG, which passes through a few billion to GS.
I figure GS made about $20 billion just on this leg of the deal.
Nice gig, if you can get it.
http://www.urbandictionary.com/define.php?term=Paulson
Stupid analysis, the entire CDS market would have tanked.
Just try collecting that $6Billion+ P&L from the hedge fund or bank that would have all gone bust.
@2 Exactamundo!
Nice trade, but too bad bonuses above X will be taxed at 90%, boo hoo……cry like a bitch….
@5 Anyone smart enough to hedge “unthinkable” risks like AIG will already be thinking about repaying TARP back in double quick time. GS will be the first to repay this timely “loan” made by their buddies in the USG and it will be business as usual after that.
Only a fool would credit anything Viniar claimed about GS’ hedging and net exposure; Viniar himself had been incognizant thereof. What Vinar babbles matters not at all, but GS conversion to holding company and acceptance of TARP funds detects all anyone would need to know.
Could this be considered a crime?
@ 8
could you be a bit more specific? b/c the question does not make sense.
In light of everything that’s being said these days I guess the whole concept of contracts and agreements is a thing of the past. How could you not make a collateral call if the swap is out of the money? Even if you’re hedged, this is the way these products have to work for the market to function.
@8…sure, I consider it a crime. Now it’s considered a crime. Have a nice day.
@8 Barney? IS that you? When is the hearing on this?
@ 8 you’re out of your element
The issue here is not whether or not they were legally entitled to these payments – they were. Goldman did not violate any laws, however, just like bondholders in GMAC or bondholders in Ford are being asked to take a haircut, Goldman and other counterparties should have been asked to share in the cost of unwinding AIG. Goldman claims its fully hedged by having collateral – well couldn’t one make the argument that if AIG had filed for bankruptcy in September, would any of that “collateral” be clawed back by the estate using Fraudulent Conveyance arguments? Also, if Goldman made a killing on AIG cds, participating in the reverse feedback loop – if I buy $10bn in CDS, it widens CDS spreads –> wide CDS spreds –> lower stock –> lower stock means rating agencies downgrade due to “limited access to capital markets” –> downgrade means more collateral posting. Frankly, they shouldn’t have had the call — they just came across as being a bunch of arrogant pricks, I hope someone forces them to recognize that without getting Fed Holding Company Status, TARP Funds or FDIC guarantees for debt issuance, they would be staring down the same path as Lehman and Bear. Perhaps some acknowledgment of taxpayer help in their survival would have been nice.
@14 Are you crazy? They’ll spin it like it was shoved down their throats even when they were fine. And when returning it, it will come off as doing a noble deed to the taxpayer.
guest@#14…
This is exactly the kind of toxic, ludicrous situation that TGFD’s suggestion for resolving this CDS mess addresses.
Details will be furnished upon request.
The Guy from Delaware
Nobody exploited this better than Ackman. Hey, lets do this really neat trade – let me short MBIA stock, then put together a 180 page presentation saying “Is MBIA AAA?”, force MBIA CDS spreads to get wider, then PUBLICLY release a letter to the rating agencies saying, “hey, stock is down x%, CDS is at y, how could this be a AAA company?” he’s probably right – MBIA wasn’t AAA, but his way of making money on the situation was nothing short of criminal and manipulative. Pages of presentations don’t make for good analysis – as Marty Whitman points out, this guy is nothing more than a slick salesman. Too bad the AIG presentation and the TGT presentations didn’t have the same effect – lets wait for the GGP plan next.
Yeah, throw in the Paulson angle, and you’ve got yourself a conspiracy theorist’s wet dream.
Michael Moore’s next movie writes itself…
@17 you neglect the most important fact, that MBIA was insuring this quaint old product called the subprime AAA and its progeny, the mezzanine CDO, to the tune of billions. All Ackman did was to shine a light on what is now coming to pass. He performed a public service and should be honored, not trashed.
This math is so flawed. All Zero Hedge calculated was the upfront cost of having $10bio of 5-yearCDS with a carry cost of 25bps instead of the current mkt level of 1942 bps. ZH takes no account for the fact that those CDS put on in 04 have 6-months left on them – not the full five year bp value
@19 – Performed a public service? I don’t mind people doing their analysis and taking an honest view on a company’s prospects – long or short. However, if your thesis is predicated upon making a public song and dance to make the trade work, its wrong. Ackman made the same predictions about MBIA’s aircraft exposure after 9/11. He was dead wrong – his loss estimates were wildly off as all of those deals have MATURED without MBIA retaining any credit losses. Will they have losses from the toxic garbage they insured – yes, will it be enough to make them insolvent – unlikely. Although the smoke and mirrors is likely to try and create that illusion. The problem with CDS in its current form is apparent – MBIA stock is near zero, CDS is implying imminent default, job done, cover position and move on.
OK look, its not supposed to be some cry-baby bullshit. Its Wall Street-the cutting edge of capitalism. If you have a agreement that dictates that collateral is posted under certain circumstances and you call collateral you are doing the right thing. If the company goes bust that is the *proof* that you did the right thing calling the collateral, because otherwise the company would have gone bust and you would have got nothing.
All this rage at GS and this talk about what they did or didn’t do with CDS is a sideshow to distract from the utter and complete ineptitude of the govt response to this crisis and that goes for Hank and Dubya just as it goes for Obama and Timmayboy. If they had let these fucking morons (AIG) go down then all these CDS and bonus contracts and everything else would be sitting in front of a chap 11 judge who would use their experience to find a solution equitable to all the creditors. In stead we have the govt stamping their foot and all this public anger and morons in the media “calling on” people to do things. What sort of bullshit if that?
We’re not a knitting circle calling on people to make another cup of tea. If GS has honoured their contractual obligations everyone should leave them the fuck alone and let them get on with making money for their shareholders, which is what they are there for. If not, they should have their asses hauled up in court. They should never have been made to take TARP money. If they need capital let them raise it in the Capital Markets that they are supposed to know so much about.
Barney Frank and all these other idiots kicking up this stink to distract from their own incompetence should go fuck themselves.
@22 well said,,however, cant the point be made that Goldman, through its actions, was somewhat responsible for AIG’s deterioration, via its CDS purchases? also,, why is Goldman receiving the AIG bailout funds, if it already has collateral? it woould appear that they are double dipping//.
@ 23
if you can call and don’t and the financial world ends up fuccd – expect a massive lawsuit. how do you think “we could have protected out equity holders, but it seemed mean to AIG” would sound? in this instance, the duty of any entity in gs’s shoes is to itself within the law. this is not a collegial experiment; it is about winning. if they are weak, kill em off. period.
23,
GS made a purchase, and that purchase was dependent on AIG’s interest in selling. In this world, people win and others lose. I don’t know if I can handle anymore “Shiny, Happy People.”
Furthermore, stop making me say things that make me sound like my grandfather.
@21 Ackman has been wrong about a lot of things, and I’m sure that he would be the first to admit it. However, that does not mean he was wrong about MBIA. He called it pretty much before anyone else, and he was right. I don’t know how much you know about them, nor about how much toxic subprime crap and CDO crap they insured, but they are paying out 9-digits a month and no firm can survive that. Give Ackman his due because he made a good call.